Sole Proprietorships and Partnerships

Oct 18

A Sole Proprietorship is the smallest form of business entity. Because there is only one person who will own and run the business, this format can cost higher (for the owner to start); however, this owner is entitled to own whatever amount of profit the business will make. Decision making will be fast too and managing the business, easier, as there will be no clashing of interests, which usually happens with multiple-owned firms.

A sole proprietorship business format, however, renders a business owner’s liability unlimited. This makes the owner fully responsible for all debts and legal liabilities of the company. Thus, if the business goes bankrupt or if the company is unable to pay its debts, then the owner’s personal wealth and assets can be taken by creditors.

Another type of business format is Partnership, a business arrangement where the owners, called partners, agree to cooperate to achieve their mutual goals and interests. The partners in this type of business can be individuals, interest-based organizations, schools, businesses, governments or a combination of any of these.

There are three classifications of Partnership:

General Partnership is where partners equally divide among themselves company profits, losses, management responsibility and liability. It is recommended that partners draft a Partnership Agreement which will outline any instance of unequal distribution in profits, losses, management responsibility and liability. General partnership comes with a tax advantage: profits are not taxed to the business; partners include these in their individual tax returns (at a lower rate) instead.

Limited Partnership is an arrangement that restricts the liability and share in profit of a member based on the amount of his/her investment. Though one or more individuals can be a limited partner, there is one who shall remain as a general partner. This general partners will exercise control the business and assume full personal liability if ever the company will incur debts and face obligations. As a general partner, however, he/she will earn higher profits, but will also have more liability in case the business suffers financial loss. A limited partner does not participate in management decisions.

Limited Liability Partnership (LLP). Under this arrangement, some or all business partners have limited liability. One partner, however, will not be held liable for the negligent act or misconduct of another business partner.

The type of business format one should choose will depend on the service or product he/she wishes to provide. According to the law firm Russo, Russo & Slania, P.C., when establishing a new company, all decisions can have a substantial impact on the future of the business. From a legal standpoint, there are a range of different choices that must be made which can profoundly influence the course of a company’s development and progress. Advice from a qualified legal professional can prove invaluable, especially for entrepreneurs.